Why Nervous Millionaires Are Buying Stocks

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For years now, many analysts have lamented the exit of ordinary retail investors from the stock market. But even if typical investors are steering clear of stocks, more affluent households appear to be biting the bullet and adding to their stock positions -- even if they aren't all that optimistic about the market's future prospects.

Last month, Fidelity Investments came out with its 2012 Millionaire Outlook. The survey of about 1,000 households with net worth of $1 million or more not only pointed to what wealthy families are doing with their money but also revealed some common threads among millionaires that contain some lessons for those of all levels of wealth.

Getting happier
One of the key findings from the Millionaire Outlook is that wealthy households are continuing to be more optimistic about the financial markets. Although the overall view that millionaires have about the current financial environment is somewhat negative, sentiment has picked up substantially since its 2009 lows. Moreover, expectations for conditions one year into the future are at their highest levels since Fidelity did its first version of the survey in 2006.

When you look at the breakdown of various factors that contribute to that outlook, there's an interesting outlier: Millionaires are optimistic about the current state of the stock market. Even as they worry about weak real estate prices and a sluggish economy, their positive views about the current stock market environment temper their pessimism and build a foundation for their more positive outlook on the future.

What millionaires are buying
Fidelity also asked what millionaires were adding to their portfolios over the past year. U.S. stocks topped the list, with CDs and stock ETFs coming in distant second and third place, respectively. Most interestingly, even when Fidelity broke down investors into several categories, stocks remained the favorite investment vehicle. Whether investors' outlook was optimistic or pessimistic, and whether their main concern was to preserve wealth or to grow their net worth, stocks ranked No. 1 in added investments.

The primary difference, though, came from what else millionaires bought. Aggressive investors were more comfortable with international stocks and bond mutual funds, while more conservative investors tended to stick with CDs and cash equivalents. That's an interesting trend, as it shows the willingness of risk-taking millionaires to bet on further capital appreciation from the bond market despite record-low interest rates, while also seeking to benefit from the bargains amid the carnage in Europe that has taken Telefonica (NYSE: TEF  ) and other solid companies down with riskier banks and other financial institutions.

Such a tendency also supports investments in rate-sensitive areas. Mortgage REITs Annaly Capital (NYSE: NLY  ) and Chimera Investment (NYSE: CIM  ) directly benefit from the current rate structure, while high-yielding utilities Southern (NYSE: SO  ) and Exelon (NYSE: EXC  ) also tend to see their prices move at least partially in line with changes in interest rates.

Are millionaires smart money or dumb money?
Of course, blindly following a herd of millionaires doesn't make any more sense than blindly following anyone else with your investments. Smart investors have to walk their own path even as they watch what other investors are doing.

Often, investor sentiment acts as a contrary indicator. But when you focus on wealthy households, do the usual contrarian rules apply, or do wealthy investors represent "smart money" that is worth following?

As I see it, the key to understanding how wealthy households are different from most people lies near the end of the survey. More millionaires are more interested in preserving what they've managed to accumulate rather than trying to make their wealth grow. In other words, millionaire households appear to be content with their current wealth levels and are more focused on not losing what they have. To me, that doesn't seem to mesh with their more optimistic actions, and so I'd be hesitant to characterize millionaire sentiment as completely positive right now.

What to do
By contrast, most non-millionaire households need to focus more on growth. Yet especially when you're just starting out, not having substantial financial assets can actually free you to be more aggressive with your investing, which in turn can make you more successful by getting you used to taking risk. In the long run, being willing to enter risky positions even during times when it seems unwarranted can make a huge difference to your quality of life. Taking the right risks can get you into the millionaire class sooner than you might think.

You don't have to be a millionaire now in order to reach your financial goals. We've got some ideas on how you can invest for the long haul in The Motley Fool's special report on stocks that will help you retire rich. Get your free copy today while it lasts!

Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.

Fool contributor Dan Caplinger believes anyone can become a millionaire with enough effort. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of Annaly Capital. Motley Fool newsletter services have recommended buying shares of Southern, Annaly Capital, and Exelon, as well as writing a covered straddle position on Exelon. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy wants to make you a millionaire.

Read/Post Comments (7) | Recommend This Article (12)

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  • Report this Comment On August 15, 2012, at 1:43 PM, JimmyZangwow wrote:

    So what happens when the next big adjustment comes? Or is 13,000 DJIA the new baseline?

    I can't help wondering when the value of American currency will require real action (going to some sort of physical metric)?

    When I see prolonged drought combined with creeping inflation and all the finance-related bubbles (stocks, education, government services, housing), it's not reassuring.

    I can't fight the one concept I am sure of: On this planet, what goes up financially, eventually comes down.

  • Report this Comment On August 15, 2012, at 4:12 PM, TMFDarwood11 wrote:

    "Although the overall view that millionaires have about the current financial environment is somewhat negative, sentiment has picked up substantially since its 2009 lows. Moreover, expectations for conditions one year into the future are at their highest levels since Fidelity did its first version of the survey in 2006."

    Looking at some of the numbers, there is no overwhelming reason to be optimistic. However, I don't think I'm more optimistic or pessimistic than the wage earner who lives below his means and therefore has excess funds to put to use.

    In my case, those funds are "excess" because we live below our means and on a cash basis. No credit card interest payments, car interest payments or interest payments on a very small home.

    I suspect that most of the people who are the basis for the article are in the same situation. How they got there is not important for the premise of the article. What is important is what they are doing with the cash available to them. Is it buying a sports car? A bigger home? A boat? Storing it in a hole in the ground? I doubt it.

    So what to do with the money that is saved? It's common sense for a 55 year old to consider that they might be on the planet for another 40 years. For someone 25, it's possible they'll be here for another 70 years.

    Prudence dictates that some financial planning be put into that, because the boogie man is inflation, which will destroy any wealth put in the mattress.

    Stocks, bonds, and commodities are all reasonable places to distribute such excess income. There are lots of formulas for deciding what to do, and a lot of good tools available. Most suggest buying some stocks or stock funds. When others are selling, that's sometimes a buying opportunity. There are always two sides to every trade I have been told.

    I sometimes look for bargains, but I don't try to time the market. I can say that my spouse and I continue to purchase stocks via dollar cost averaging with the excess funds available to us. These are distributed to about a dozen funds.

    The alternative is to pretend it's new year's eve, 1999 and that the world will end in a few hours. So don't save and certainly don't plan for a future. After all, it is 2012 and the Mayan calendar is about to reset. I don't think that's the overwhelming motivation for most of the people cited in the article. It certainly isn't for me. And yes, the Yellowstone caldera may erupt and obliterate me in the next few minutes, or whatever.

    But what if life goes on and politicians do continue to do really stupid and irresponsible fiscal things, and what if costs do rise in the future as they tend to do? How to deal with that? That is the question.

    Most of the arguments seem to be about finding "a sure thing." The only things I know with certainty is that death will occur, taxes will most likely increase, and inflation is a reality. Everything else is conjecture, and I'm not a gambler. If I were, I'd stick to lottery tickets as the place to put my excess funds. Why dabble in gold? Why shoot for 10% in a month? Just skip the middle man and go right to the source!

    But i am not a gambler.

    I'd be interested in how most of the millionaires who are the source of the statistic for the article live their lives. My guess is "they live life in moderation."

  • Report this Comment On August 15, 2012, at 5:41 PM, JadedFoolalex wrote:


    Apparently you haven't seen an Andex chart.


    Worrying about what was, is or could be is a mugs game! Millionaires live according to what they need. They work their asses off to get to where they are then more even harder to keep it that way! You say you live frugally, then keep on keeping on and you'll be fine!

  • Report this Comment On August 15, 2012, at 6:12 PM, dennyinusa wrote:

    Yeah, George Bush, Paris Hilton and Donald Trump worked their asses off.

    Oh wait that was their grandfathers and fathers.

    Keep kissing the ring of the royals.

  • Report this Comment On August 15, 2012, at 6:49 PM, marei wrote:

    The upper class tends to invest, the lower class tends to spend, the middle class tends to do both.--Tom Reilly

  • Report this Comment On August 15, 2012, at 8:49 PM, Shawnerz wrote:

    My guess is Fidelity interviewed their customers who have a net worth of over a million.

    Since Fidelity is a brokerage, it would stand to reason that the majority of their customers would favor trading stocks.

    If Fidelity asked 100 random millionaires, I think they'd get a different response.

  • Report this Comment On August 16, 2012, at 2:47 PM, jm7700229 wrote:

    I think 100 random millionaires would probably have significant assets in equities. Reasoning? It's hard for a working person to accumulate that much with savings accounts. I just looked up an investment my wife rolled into an IRA in 1995. $24,000 is now $276,000. 5% bank interest would be $56,000. That's In a single Fidelity mutual fund. We've been through two bubbles and two crashes in that time.

    I'm 67 and my wife is 65. We have enough in liquidity to be comfortable for another 20 years. The rest -- the majority -- is in equities. In 20 years, that will be worth far more, and most of it will go to my heirs. Why would I not be in equities?

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